Futures contracts, options on futures contracts and numerous other types of financial products are traded using exchanges established for such trading. Such trading may involve potential purchasers of a financial product submitting orders known as bids. A bid order may include a bid price representing the value at which a potential buyer is willing to purchase the financial product in question. Similarly, potential sellers of a financial product may submit orders known as offers. An offer order may include an offer (or “ask”) price representing the value at which a potential buyer is willing to sell the financial product in question. A bid order may be matched to an offer order so as to execute a trade in the financial product that is the subject of the matched bid and the offer.
So as to avoid wasting computer resources processing orders that are unlikely to be matched, an exchange may use a price band to set a price range for acceptable bids and offers. If an incoming order has an associated bid or ask price within the price band, the order is accepted for further processing (e.g., entry into an order database and evaluation for potential matching against other orders). If an incoming order has an associated bid or ask price that is outside the price band, the order is rejected. A rejected order may, for example, be the result of an input error by the party submitting the order. Such errors are sometimes called “fat finger” errors.
A price band is typically established by first determining a banding start price (BSP). The price band is then set as a certain range of values above and below the BSP. For example, a price band for crude oil futures contracts may be set at 75 ticks above and below a BSP. As known in the art, a “tick” may represent the minimum price fluctuation permitted by an exchange during a trading session. At any point in time, an incoming order for a crude oil futures contract is compared to a +/−75 tick price band centered on the current BSP. If the order has an associated bid or ask price within that price band, it is accepted for further processing. If the order has an associated bid or ask price outside that price band, the order is rejected.
It is desirable for a BSP to accurately reflect a current market value for the financial product in question. In at least some current methods, a default value for a BSP is the most recent settlement price for the financial product in question. As is also known in the art, a “settlement price” for a futures contract and for other types of financial products may be an official closing price for the product set by an exchange at the close of a daily settlement cycle for a daily trading period. That settlement price may not reflect an accurate value of the financial product, however, particularly if there has been significant trading in that product since determination of that settlement price. Accordingly, if there is recent trading data available for a financial product, current methods will use such data to calculate the BSP.
Existing methods for BSP determination can determine a fair value for BSP in liquid markets. When prices are stale and a market for a particular financial product is illiquid, however, existing methods may result in a BSP which is a less accurate indicator of fair market value.